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How can you get rid of money eating insurance policies?

One financial mistake that many of us individuals make is to load ourselves with expensive or high premium life insurance policies, thinking of them as investments that will give us a good return in years to come.

Its October already and we are approaching the end of 2020. It’s been an extraordinary year where many of us were either forced to or had that extra time to re-assess priorities in life. As we get to the end of the calendar year it’s also a good time to re-think our financial priorities too; what is it that we really want our money to achieve for us? How can we make our money work harder for us?

Asking these questions is step one and digging through our financial journey to pull out the mistakes we shouldn’t repeat, the next step.

One such financial mistake that many of us individuals make is to load ourselves with expensive or high premium life insurance policies, thinking of them as investments that will give us a good return in years to come.

Ten-fifteen years later, will they really turn out to be the top investment choices that they appear to be now?

Low growth rates

A high premium life insurance policy is hardly the right long-term investment you are looking for. While the illustrations that you see at the time of considering this option may show you high returns in the range of 8%-10%, if you dig deeper you will find that these are not guaranteed returns, rather they are ‘assured’. 

What happens if the insurance company is unable to deliver this return? Nothing, you lose out. Secondly, not all of the premium you pay each year goes towards investments.

Part of it will go for paying high commission to your insurance agent, another portion towards mortality costs on insurance which has nothing to do with your investment and there will be more sundry deductions towards other charges and administrative costs.

Whatever is left over will get invested. At the end of it the general experience has shown a long-term return of 5%-6% pre-tax. 

You may think that at least the return is safe. However, given that you don’t even know for sure what you will make, it’s not really the best way to approach your long-term earnings. You are better off allocating to public provident fund and debt mutual funds for a stable and efficient return outcome. 

If a few years down the line you realise that you made a mistake or want to increase the life cover you opted for, all you can do is give up this existing policy, lose the premium paid so far and take a new one. There is no way to switch out efficiently from a bad insurance policy. 

No transparency and flexibility

That’s the other issue, once you have paid the premium there is no transparency. You have no idea where the money is being invested and you have no control if you want a better option.

If a few years down the line you realise that you made a mistake or want to increase the life cover you opted for, all you can do is give up this existing policy, lose the premium paid so far and take a new one. There is no way to switch out efficiently from a bad insurance policy. 

Go back to the insurance drawing board this year. Dig out all the high premium life insurance policies you have and check the fine print on what is promised. Ideally, a life insurance policy should only be in the form of a term policy that helps you cover the eventuality of your untimely death to provide your family with financial stability.

Anything else from an insurance policy is just a costly, opaque investment which will prove to be a mistake. It’s best to end such policies. Term life policies give you a much better life insurance cover at a much cheaper premium. The amount you save from the expensive policy you have can now be invested in more gainful long-term investment options. 

 

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